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Deriving Foreign Currency Impact On Cash Flow Statement (indirect)

Asked on Oct. 29, 2015

Foreign Currency Impact On Cash Flow Statement

On foreign currency impact on cash flow statement,  I have been asked to prepare the statement of cash flows for our Company. In the past I had prepared the cash flow using the USD balance sheets, but now I've been asked to prepare the cash flow in the local currencies first and then translate them to USD to include the line item for the impact of foreign currency gains or losses. I can't figure out how to prepare the statements to reflect this. Not sure if this matters at all, but we we are also now required to carry the CTA on the income statement and not the balance sheet. Any help you can give on the cash flow statement methodology will be greatly appreciated!

Answers

Robin Ryan's headshot
Robin Ryan Controller • March 28, 2013

Okay, I'll share for anyone who might be interested. You prepare a cash flow worksheet for all of your foreign subs in their local currency. Then the summary column for their local currency cash flow totals is transferred to a consolidation worksheet and the beginning cash is translated at the prior year's EOY rate, the ending cash is translated at the current year's EOY rate, and the line items for the changes are all translated at the average rate for the year (unless you have historical non-monetary assets). The fx impact will be the reconciling USD amount for each sub. You add the columns across for each sub (each translated as above) and eliminate intercompany accounts to get your consolidated cash flow. Has anyone ever used this methodology before?

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Sarah Jackson's headshot
Sarah Jackson Associate Editor • April 11, 2016

Proformative offers 400+ business courses with free CPE, many on FX and Accounting.

Bob Scarborough's headshot
Bob Scarborough CEO • March 29, 2013

A fairly straight forward way to support this is to build your cash flow statement on your consolidated data. Ideally your financial system has a consolidation module that supports the rollup and CTA computation.

The rollup process usually runs something like:
1) Valuation to local functional/reporting currency in each subsidiary - including revaluation of sub-ledger transactional data for realized or unrealized gain/loss.
2) Consolidation of subsidiaries - which needs to work with the subsidiary revaluation method (re-measure or revalue) and the account models (month end, period average, historical rate). Ideally the CTA computation is done for you - for the prior month revaluations as well as the current period.
3) Once everything is in your consolidation currency you write your cash flow statement against the consolidated data. If CTA is substantial you may want to list it as a separate line item.

I'm not sure it matters where you carry your CTA - since sources and uses of cash includes the impact of your balance sheet on cash. The impact of unrealized gains/losses as well as the CTA, depending on the currencies, could have a substantial impact on the month to month reporting. Actual cash management moves even further from this statement (my two bits) given the impact of currency on this statement.

Bob Scarborough

Helen Kane's headshot
Helen Kane President • March 29, 2013

ASC 830-230-55 provides specific translation instructions based on your functional currency as well as a proof of that amount. You are correct in preparing the cash flow statements in local currency, following the correct translation rules, then consolidating and "plugging effect of exchange rate on cash".
The effect of moving your CTA to the P&L means your auditors have made the determination for you (should be management decision per ASC 830-10-55-4) that your parent currency is the functional currency for your subs. I am a huge fan of parent currency functional, but it generally should not be an auditor decision, nor a decision taken lightly.

Dan English's headshot
Dan English VP of Finance • March 30, 2013

I always prove out the effect of exchange rate on cash to ensure my model is working; but starting with local currency CF statements is the most transparent way to see all pieces.

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